Hochtief AG

XETRA:HOT

Earnings Call Analysis

HOCHTIEF Reports Strong H1 2023 Performance

In the first half of 2023, HOCHTIEF witnessed robust sales and profit growth, underpinned by significant high-tech infrastructure projects and order book improvements. Sales rose by 9% to EUR 13 billion, with operational net profit increasing 8% to EUR 270 million. Cash flow grew considerably, contributing to a solid net cash of EUR 346 million, a year-on-year rise of EUR 381 million. New orders spiked by 26% over the previous year, leading to an order book of EUR 53.6 billion, showing an 8% annual increase when adjusted for FX impacts. The company's strategic shift towards high-tech, energy transition, and sustainable infrastructure combined with prudent risk management bolstered these results, with low-risk orders making up 85% of their book. Investments in energy storage systems, electric vehicle battery production, and digital infrastructure, including EDGE data centers, underscore HOCHTIEF's pursuit of growth in emerging, high-demand sectors.

Robust Sales Growth and Profitability

HOCHTIEF demonstrated a strong financial performance in the first half of the year with a 9% increase in sales to EUR 13 billion. The operational net profit followed suit, growing by 8% to reach EUR 270 million. Moreover, nominal net profit showed even more vitality, rising by 9% year-on-year to settle at EUR 262 million.

Solid Balance Sheet and Cash Position

The company's financial standing appears robust, with a net cash position that improved significantly by EUR 381 million year-on-year, amounting to EUR 346 million. This is marked by a substantial quarterly surge of EUR 736 million compared to March, illustrating a strong cash flow momentum.

Stability Backed by Credit Rating

The company's stability and future prospects are underscored by S&P's reaffirmation of its investment grade rating with a stable outlook, indicating confidence from the credit markets in HOCHTIEF's financial health and strategic direction.

Impressive Order Book Growth Focused on Lower-Risk Projects

New orders rose by an impressive 26% to more than EUR 18 billion, contributing to a sizable order book standing at EUR 53.6 billion, up 8% year-on-year on an FX adjusted basis. Notably, the company has successfully increased the proportion of lower-risk projects in the order book to about 85%, up from around 80% at the end of the previous year.

Diverse and Strategic Market Expansion

HOCHTIEF's strategy places a strong emphasis on expanding its presence in high-growth markets, such as high-tech, energy transition, and digital infrastructure. This approach has led to positive margin development and order book momentum in the Americas, strong revenue growth in Australia, and robust new order intake in Europe. Strategic pursuits in these markets are anchored by large-scale projects, like the construction of energy infrastructure for Neoen in Western Australia, and the development of electric vehicle battery plants in both Kansas and Ohio, which highlight the Group's forward-looking focus.

Commitment to Sustainability and ESG

HOCHTIEF's commitment to Environmental, Social, and Governance (ESG) initiatives is evident through its CIMIC arm, which is a leader in mine rehabilitation, boasting over 10,000 hectares of rehabilitative work accomplished since 2007. The company's drive to invest in equity is aligned with its ESG commitments as it positions itself to be climate-neutral by 2045.

2023 Profit Guidance Affirmed

In conclusion, HOCHTIEF has confirmed a steady course for the remainder of the year by reaffirming its guidance for operational net profit, expected to land between EUR 510 million and EUR 550 million. This guidance reflects the continued strategic execution and fiscal discipline, which should instill confidence in investors looking forward.

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon to everyone, and thank you for joining us for the presentation of HOCHTIEF's First Half 2023 Results. I'm Mike Pinkney, Head of Corporate Strategy and I'm here with our CEO, Juan Santamaria; our CFO, Peter Sassenfeld, as well as our Head of Capital Markets, Tobias Loskamp and other colleagues from the senior management team of HOCHTIEF.

We're looking forward to taking your questions, as always, but to start off with our CEO who's going to run us through the key aspects of our performance during the first six months of the year. Juan, all yours.

[Juan Santamaria, CEO]

Thank you so much Mike and team. Good afternoon to everyone and thanks for joining us. HOCHTIEF have achieved robust performance during the first half of 2023 with higher sales and profits, a strong growth in the orders and a solid net cash position at the end of June. This reflects our strategy to further strengthen HOCHTIEF's position in its core markets, whilst at the same time, pursuing selective growth opportunities in the rapidly expanding areas of high-tech, energy transition and sustainable infrastructure market. Furthermore, we continued steadily improving the risk profile of our order book and executing our ESG priorities.

Now, let's look at some of the key numbers. Sales increased by 9% during the first six months of the year to EUR13 billion and HOCHTIEF's operational net profit for the period rose by 8% to EUR270 million. Nominal net profit of EUR262 million was 9% higher year-on-year. During the second quarter, cash flow from operating activities pre-factoring showed a strong performance, increasing by over EUR100 million year-on-year to EUR676 million. On the last 12-month basis, this cash flow metric stands at close EUR1.2 billion, up over EUR400 million, compared with the previous period.

HOCHTIEF ended the period with a solid balance sheet showing net cash of EUR346 million, an increase year-on-year of EUR381 million. New orders during the first half of 2023 rose strongly to over EUR18 billion, up 26% and includes several important high-tech infrastructure projects. At the end of June 2023, the Group's order book stands at EUR53.6 billion, up by 8% year-on-year on an FX adjusted basis.

On the Slide 6, we can see the group's outstanding cash performance in more detail. As I indicated, the group achieved a strong cash flow performance during the second quarter of the year. The cash flow figures for the first six months incorporated the characteristic seasonal movement seen during the early part of the year. Looking at the last 12 months, to adjust for the seasonality, underlying cash flow from operating activities stands at a high level of close to EUR1.2 billion, highlighting company's strong and sustained cash conversion.

On the Slide 7, you can look at the positive net cash evolution. For the end of June, HOCHTIEF has reported a net cash position of EUR346 million. This represents an increase year-on-year of EUR381 million. Looking at the quarterly movement, the period end figure shows a EUR736 million increase compared with March, driven by the firm second quarter cash flow performance. I would also like to note that in June, the credit rating agency S&P reaffirmed its investment grade rating for HOCHTIEF with a stable outlook.

The next two slides show more detail on the development of the group's quarters. Our new orders rose substantially during the first half of the year to over EUR18 billion, an increase of 26% year-on-year and equivalent to approximately 1.25 times work done in the period. The EUR9.5 billion of work won in the second quarter was 21% above Q2 2022. These significant increases are being driven by the strong growth we're achieving in the high-tech, energy transition and data infrastructure sectors, a central pillar of our group strategy around 50% of our new orders in the first half of the year were secure in this structural growth markets we have identified.

At the end of June, our order book stood at EUR53.6 billion, which, on an FX adjusted basis represents an 8% increase year-on-year. As a result of opting the risk and approach to order intake, a vast majority of the new work secured during the January-June period was lower risk in nature. The consequence is a proportion of lower-risk projects in our order book is now approaching 85%, up from around 80% at the end of last year. From a geographic perspective, over half of our backlog, 55% is located in North America with a further 35% in the Asia Pacific region and 10% in Europe.

In the presentation, you can find more details on the solid performance in H1 2023 of our divisions. But let me just highlight: First, the positive margin development and order book momentum in Americas; Second, the strong revenue growth at Sydney; third, a sharp increase in new orders at Europe; and fourth, solid traffic and tariff growth in capabilities.

I wanted to take some time now to give you an update of our new strategy which we presented at the full-year 2022 results presentation back in February. Our pursuit of opportunities in rapidly expanding high-tech, energy transition and digital infrastructure markets [indiscernible] as I just underline, their continued focus on further de-risking of the order book. In parallel, we continue enhancing our engineering systems and logistics know-how and remain focused on delivering on our ESG commitments.

Furthermore, our capital allocation decisions support the group's diversification and simplification goals, as well as our high-tech infra expertise. We're now entering a new phase of our strategy, where we can begin to harness our investment expertise in these strategic sectors.

Let me give you some examples of areas and provinces we're working on. Our reliable energy supply system that helps to manage renewable energy distribution is essential if net zero aspirations are to be realized. Battery Energy Storage Systems or BESS as they're known, will play an increasingly important role in this. In June, CIMIC's subsidiary UGL announced it had been contracted to build a 219 megawatt BESS and associated energy infrastructure in Western Australia for Neoen, a leading independent producer of renewable energy. This is the third project of this type we have been awarded so far this year.

At the beginning of 2023, the group was contracted to install a Tesla supply BESS and associated high voltage grid connection, 250 kilometers West of Brisbane. And during the second quarter, we were also selected to install a 35 megawatt one-hour facility in Port Hedland, Western Australia. As a leading designer and constructor of sustainable electricity generation and storage assets, UGL has already delivered 17 major renewal energy generation and storage projects. I wanted to briefly touch upon the topic of hydrogen which has the potential to be another important contributor to regrow our transition to net zero. In Australia, for example, the government has stated an ambition to become the world leader in hydrogen by 2030 with potential related investments of up to AUD300 billion.

CIMIC has been involved in four major front-end engineering design studies based on its engineering expertise and we are currently constructing a hydrogen-ready power generation plant in New South Wales. This leaves the HOCHTIEF Group in a strong position as hydrogen-related investments ramp-up. As well, HOCHTIEF continues to rapidly expand its presence in electric vehicle batteries manufacturing, a strategic market for the Group. In the US, Turner's most recent major award was a project for Panasonic Energy's $4 billion, EV battery production facility in Kansas. The plant is expected to begin production by the end of March, 2025 and will eventually reach approximately 30 gigawatts of annual production capacity.

The Turner joint venture is also building a multi-billion electric vehicle battery plant for Honda and LG Energy in Ohio. Annual production capacity will be some 40 gigabytes-hours by the end of 2025. Another area where HOCHTIEF is well placed is the digital infrastructure sector, where the rollout of high-tech infrastructure including 5G and its applicability in state-of-the-art facilities is rapidly expanding.

So far, in 2023, Turner has been awarded projects to build four large-scale data centers worth in total over EUR500 million. And following several awards and completions of data center projects in the Asia-Pacific market, CIMIC recently secured another data center contract in Hong Kong for a major international developer. Overall, at the end of June, the Group had over EUR4 billion in digital infrastructure projects in the order book.

As we become a leader in these high-growth markets, capital allocation will play an increasingly important role in the strategic development of our company. We are now beginning to invest equity in these high-tech growth sectors where we can apply the financing, project management and O&M capabilities we have built up over many years in our PPP business.

In Germany, for example, HOCHTIEF and an infrastructure partner will invest in decentralized and sustainable EDGE data centers. The demand for these sustainably-built and operated data centers is very high, especially in Europe and construction is carried out to the highest energy efficiency standard. They are the basic infrastructure for many new technologies and particularly suitable for regionally-oriented companies that prefer computing power and data storage close to their headquarters and customers.

Furthermore, as the importance of cloud computing continues to grow and artificial intelligence applications evolve, more and more companies want to convert their IT systems to this model to process and store data. Another example of how we are expanding our presence in the value-chain of these high-growth industries is the Australian Glenrowan solar farm project. During the first half of 2023, CIMIC commenced construction of this solar farm in Northern Victoria, the development rights of which were acquired in 2022. The company will develop, invest in, and manage the solar farm, with our services subsidiary UGL to undertake construction, operations and maintenance.

The 245-hectare solar farm will have an installed capacity of up to 130 megawatts and generate enough electricity to power approximately 45,000 Australian homes. This renewable energy project development is part of our strategy to establish a diversified portfolio of energy and utility assets within the Australian National Electricity Market.

Let we move on to another strategic area, natural resources, which is playing a key role in driving energy transition globally and producing a significant increase in demand for lithium, nickel, copper amongst others, as well as rare metals. Last year, we acquired [Onix] (ph) a company with strong product management and engineering expertise in this area. But to further develop our know-how, in July this year CIMIC purchased Canadian engineering and metallurgy company, Novopro. With its strong know-how in lithium processing technology, HOCHTIEF gains additional actions to opportunities in this expanding sector, as demand for batteries and electric vehicles increases, while enhancing the group's North American presence and offering to clients. This bolt-on acquisition is consistent with the group's strategy of expanding our presence in the value chain high-tech infra as well as [indiscernible] strategy targeting a growing pipeline of metals and minerals opportunities.

We also continue to be very active in PPPs, a long-standing core area of expertise for the Group. In June, HOCHTIEF won a major PPP building contract in Berlin. The Group will refurbish and build new offices for the Institute for Federal Real Estate and subsequently operate and maintain them over a total 30-year period. Our objective is to help the client make the buildings more sustainable; as the retrofitting contract covers the refurbishment and operation of the properties, we can optimize these buildings over their entire life cycle. As a result, we can reduce the carbon footprint as well as the operating costs of tenants and in the process help create around 2,400 jobs.

HOCHTIEF has also been awarded a PPP contract in Germany to build a new central location for the University of Applied Sciences for Police and Public Administration in the state of North Rhine-Westphalia. HOCHTIEF will rent out the university campus and deliver operational services for an initial 20 years after the construction work of around EUR200 million is completed. Environmental, Social and Governance, ESG, is a strategic priority for management. In 2021, HOCHTIEF made the commitment to be climate-neutral by 2045.

Our sustainability performance already puts us amongst the leading companies in our industry. HOCHTIEF subsidiary Turner has been recognized for several years as the largest green builder in the United States. In Australia, we're one of the leading providers of sustainable infrastructure projects. CIMIC, for example is a leader in mine rehabilitation with skilled teams from environmental and operational specialists. Thiess has delivered award rehabilitation programs globally for more than 30 years, and is a trusted partner in sustainable mining operations with over 10,000 hectares of rehabilitation work executed since 2007. Meanwhile, back here in Germany, environmentally-friendly projects in building and infrastructure account for the majority of our new projects. Our strategy, and the high-tech markets we are focused on, are helping our clients achieve their ESG goals.

So to wrap up, HOCHTIEF has delivered solid figures for the first half of the year with strong cash flow performance, positive operating margin momentum, further substantial progress in risking of our order backlog, and a significant increase in new orders particularly in the high-tech sectors where we're focused on we are starting to selectively invest equity. Furthermore, we continue to advance with our ESG commitments. Finally, we can confirm our guidance for 2023 on operational net profit in the range of EUR510 million to EUR550 million.

Now, thank you very much everyone for listening and I welcome your questions.

[Operator]

And we have the first question from Luis Prieto from Kepler Cheuvreux. Please go ahead.

[Luis Prieto, Kepler Cheuvreux]

Good afternoon. Thanks a lot for taking my questions today. I just have one actually. And, it is basically another almost three years have passed of Elliott's entry into Thiess, how should we think about the production on state going forward into next year and the following? Thank you.

[Juan Santamaria, CEO]

Thank you, Luis. So, I mean, just to give everyone the framework, although I think everyone understands the framework, pretty much Elliott has the right to execute that put starting in year three to year six, which means that pretty much they start in 2024. And what are the chances that Elliott execute that put? We don't know. We're in conversations with them right now to see if they want, if they're open for discussions because certainly we would be open to discussions. We always thought very highly of this business, and we believe that it's a very good business in performance. And as we diversify and transition Thiess into more green mining, certainly, we emphasize even more our position.

From a rating agency perspective, we consider in our Group the liquidity and our position as if Elliot was going to exercise the put in year one. So, that's what we are looking in our accounts. Difficult to say at this stage, but we might have more information at the end of this dialog that we're having right now with Elliott and probably that will happen in second half of 2023. So, by the end of the year, we'll know exactly Elliott's position.

[Luis Prieto, Kepler Cheuvreux]

Excellent. Thank you very much.

[Operator]

The next question is from the line of Graham Hunt from Jefferies. Please go ahead.

!!!

[Graham Hunt, Jefferies]

Hi, thanks for taking the questions. Three from me. First, I'm just wondering if you can share a little bit on, I guess, some of your risk management processes as you're seeing so much order intake and order backlog at kind of record levels across the business. How are you managing such strong growth in terms of the risk profile of the order book and bringing that down? Any specifics on that would be helpful.

And then just on the US market. I wondered if you could give us any latest trends, you talked about obviously the strength in the high-tech infrastructure end markets. But maybe some of the other markets, some on commercial and on resi, hotels, et cetera, what is the latest that you're seeing there would be very helpful. Thanks.

[Juan Santamaria, CEO]

Thank you, Graham. Well, first of all, starting with the risk management. We're being very strong, and I think that I make emphasis in -- into our presentations on the level of risk that we're willing to take, which is very low. It's very low not only in sectors where traditionally have low risk such as Turner or UGL or Thiess, et cetera, but throughout the entire group, right? That would include civil works and building as well.

So, basically our new policy in general only allows different companies to get into lower-risk contracts, we have to get into projects where there is progressive design together with the client alliances cost [pluses] (ph). I mean there was a design-build component only for work that we've done in the past and in regions where we are very consolidated and traditionally in the same projects, same region where we have a consistent profits. Basically, if you follow either approach, when you go through the -- I mean, our general backlog, we are about to achieve as I said in the presentation 85% of our portfolio, characterized as low-risk projects.

But when you look at our new index, we get above the 95%, because basically, most of our work in hand are in this basis, we're not doing EPCs, right, basically we're not doing the same deals. We have a few exceptions that we're willing to consider, and basically risk acceptance are what we drive or we built for ourselves. It is our developments, Glenrowan for example, it's our solar farm, we built for ourselves. We're happy to take the risk, because it's for us, we're not subsidizing anyone else if things were in the wrong direction, which by the way are not, okay. We're quite comfortable with where we were pricing these days.

In order to do that, we appointed a new Chief Risk Officer at HOCHTIEF level. We put a three management committees with a focus pretty much in spotting any risk, one for North America, one for Europe and one for Asia all of them in place and they are working very, very well.

In terms of the US market, you were asking for a -- pretty much the way we are distributing our work-in-hand or how things are going in the commercial offices, building space, traditional sectors. [indiscernible] will start giving an overview of the order backlog in the first half of 2023 for North America for example. So, 12% of our backlog is in education, and when it comes to hotels, residential and commercial, we will be talking commercial 16% and hotel residential by a [5%] (ph). And that's more in the traditional side. What are we seeing in that sector? If you asked our opinion six months ago or a year ago and a year and a half ago, I was always a little bit skeptical about the evolution.

I was very optimistic in general in Turner, because of batteries, because of biopharma, data centers, 5G in general, there's opportunities for Turner to getting into semiconductor space, and we're pursuing them. And I was very, very excited about those. And, I was seeing those opportunities not only opportunity to grow the company, but also to replace potential, more traditional backlog. And that's the way that we were planning our spot in North America. It was a possibility to grow, but I mean, what are we seeing right now that everyone is retrofitting their current commercial office space, everyone is turning their buildings into more sustainable.

So, a sector that I thought was going to see a decrease, it's actually increasing which comes to as a surprise to me, and that's not only in the US that's happening across Europe and across Australia. Everyone wants a more modern office, more connected, more sustainable with more modern spaces, et cetera, et cetera. So, there is a lot to do with that. In healthcare, there is a huge expansion in Healthcare, not only biopharma, I mean, traditional hospitals across North America. And in the case of the stadiums, that's more stable. I mean there's always -- I mean that continues in a stable path, we're not seeing growth, we're not seeing declines at this stage, a lot of retrofitting as well about all stadiums, and that's happening because technology is evolving too fast, and most of what we're doing, yes, there's from time to time a new stadium that requires a demolishing, but there's a lot of retrofitting of pretty much to change IT, to change the structure, et cetera. So, in general, we're seeing positive performance for areas with huge growth in the high-tech space.

[Graham Hunt, Jefferies]

Thanks very much.

[Operator]

The next question is from the line of Marcin Wojtal from Bank of America. Please go ahead.

[Marcin Wojtal, Bank of America Merrill Lynch]

Yes, good afternoon. Thank you for taking my questions. The first one is just a follow-up on your contract mining business piece. Can you confirm whether you received any dividends from Thiess in the second quarter? And if so, what was the amount received?

And question number two, if I may. Can you talk a little bit more broadly about the outlook for Asia-Pacific in what segments of the market are you seeing encouraging order intake? What is the competitive environment, and how should we think about your profitability, you are mentioning in your statement that there is some diversion from the West Gate Tunnel, but is your underlying profitability in Asia Pacific improving or a little bit deteriorating? Thank you.

[Juan Santamaria, CEO]

Thank you, Marcin. So, let me start with the mining business in general and [indiscernible]. So including MACA, the profit contribution from Thiess in the H1 was AUD57.3 million that was versus AUD62 million in the same half 2022, and the dividend from Thiess was AUD54 million. And that's pretty much versus AUD89.5 million in 2022.

Now, we're already seeing the growth in Asia Pacific in margins, et cetera. So let me tell about [indiscernible] margins. Margins in general, right now, are a little bit low for two reasons. The first one is, I mean, West Gate is in its peak. West Gate project in the past as I mentioned as part of our agreement on that job, we were not taking any profit on the project. So it means that all the revenues that come, come at a no profit. And also interest rates have increased significantly, across the board, but that affected more the CIMIC, I mean, CIMIC part basically because of the debt structure and also in part that with Thiess as well, because of the agreement we have with Elliott. [indiscernible] They have AUD180 million guarantee. And as the interest rate increases and affect Thiess, we only get the difference versus the AUD180 million. So that's affecting. I believe that, that's only throughout West Gate, that's only seasonal. We are expecting to see back margins as in the past, we have no doubt.

Where do we see the growth? Well, we see growth first of all in Australia. The transmission lines, renewable projects, a lot of work, lot of work in both areas in renewables, in batteries, solar farms, we see a lot of work in datacenters across Asia, so that's -- we are seeing that increases significantly. If you -- if you look at some of the -- I mean, just examples of the pipeline, we are bidding just in Asia, we're looking in Australia for CopperString that's around AUD5 billion to AUD8 billion.

We only -- we announced that this year, but we only announced engineering part, because we do have a negotiated deal that we have won, we won the first part, which is engineering, it's around AUD50 million, but we are negotiating the entire AUD8 billion for us on a 100% basis. Right? So, that's not right now, work in hand, but that will come at some point once we negotiate with them. We're seeing a lot of datacenters across Malaysia, Singapore, Indonesia, Philippines, Hong Kong everywhere. We see as we have transitioned, and I'm going to get back to one of my points in the presentation. I'm going to open up a parenthesis. We have one firm called Sedgman that traditionally was doing only processing plants associated to coal.

And as you can imagine for a number of years, there is no new processing plants associated to coal mines. But also, we made a commitment not to get into coal greenfield projects in mining. So, for the last few years, we've been -- as I was talking in the presentation diversifying that to a [indiscernible]. The amount of new work coming from nickel, molybdenum, copper, lithium, et cetera, et cetera, I mean, of course coal, of course other [indiscernible] is unbelievable. So there's a lot of growth in that states and because we have expanded our engineering capabilities, not just mining operations, but engineering there's a lot of work potentially industrial side of lithium, nickel, magnetite, molybdenum, being rarest in the industrial side.

And I mentioned before solar farms on the Glenrowan, we're looking at five new opportunities to develop the right overland that we do have an option, potentially to generate and to develop and those will be renewables. I mentioned in my presentation the three to four storage facilities, the batteries that we're building for Neoen and Tesla. We are going to apply those for similar clients with different technology, but also, we see opportunities to implement those in some of our solar farms and other for our solar farms that we built in the past up to 2017, where there is a potential to install some of those batteries.

And I focus obviously a lot of this in Asia Pacific, but this could apply globally, but specifically in Asia Pacific because of your question. We're also seeing a lot of alliances around dams, from hydro projects, we're seeing a lot of work in hospitals around Australia. We're seeing work in infrastructure associated to natural resources potentially to hydrogen. There is a huge pipeline that's riding on coal, so that's growing slowly, but whenever we ramp up, it's going to grow significantly, and not to give you a few examples but we believe -- we believe it's going to grow.

Now, a big question we always have is Hong Kong. That was one of our biggest markets in the old days, and right now has been reduced almost to zero, except for operations in data centers, private clients. I believe that, that eventually has to come back, and we're having good conversations with clients. And if you look at our cash flow, they like in Asia and because specifically, Hong Kong, it's the only region of all our regions globally that hasn't achieved 100% conversion operating cash flows, speaking, right? So, I will believe that 2024 has to be the breaking point, right? In 2024 that has to change and we'll recover normality in contracting and freeing cash flows.

And what other example can I give you? From a civil perspective, Philippines, Indonesia, Hong Kong, huge pipeline, probably Australia is going to slow down. The peak will be 2024 and there will be little slowdown probably for two, three years and then plans will come later. I'm not concerned too much about that as I think that we will stay in a good position at least for the pipeline even it will be more reduced. I don't see so much work in building, in Australia. But we're not in residential anyway, that has never been part of our pipeline. It's part of our pipeline hospitals where as I mentioned before it's growing significantly, and I hope this gives you an overview of that market.

[Marcin Wojtal, Bank of America Merrill Lynch]

Thank you very much.

[Operator]

The next question is from the line of Victor Acitores from Societe Generale. Please go ahead.

[Victor Acitores, Societe Generale]

Hi, good afternoon team. I have two questions. The first one is on the Slide number 6 when we disclose the cash flows, is on the factoring, on the second quarter, we have seen the factoring is slightly higher, EUR200 million. In order to understand first, what level of factoring, we could see that could be at the end of the year? And the ratio [indiscernible] is growing and let's say on sales growth, because they are different [indiscernible] collecting. This is the first question.

And the second question is regarding the slide on CIMIC, that is slide number 11 is, in order to understand where we can see that the cash conversion of EBITDA could go at the end of the year. The first half is close to 50% what could be the level at the end of the year. Thank you.

[Juan Santamaria, CEO]

Okay, thank you so much, Victor. So starting with the factoring. I mean, I think we are in a very, very reasonable levels of factoring, right? It's a little bit of a call it seasonal, and it's from a -- from merchandise, I believe, I think that it's very similar to the same levels a year ago. We feel comfortable in these levels, probably we'll reduce by the end of the year, that's what we saw last year, and probably it will reduce in the second part, as we go. I am not -- I mean, we're not willing to increase that amount or decrease, we were comfortable at the current levels.

And regarding the cash conversion at CIMIC, we are at 50%, that's correct, it's true that it's -- it would be with our like Asia it would grow close to 75%. And I think that the reason for it is just, I mean it's just seasonality, I mean, we're not seeing any problem. I mean, I believe that, when talking about the conversion before I was -- I was thinking of forecast for 2024 -- sorry 2023, we are not seeing any major issue right now that we're not concerned. And in fact, the only area where most of the total, the conversion is coming from which is Hong Kong, we have been waiting for three years right now, resolution of a lot of litigations, arbitrations, et cetera, et cetera.

And well, sorry, more than arbitrations, litigations or reconciliations, which means that we would get faced, I mean, it's not that we'll depend on a judge, typically those process are very normal in Hong Kong. So, that should be unwound at some stage in our favor. But yeah, I mean nothing, I don't see there's a major issue in the region.

[Victor Acitores, Societe Generale]

Thank you.

[Operator]

The next question is from the line of Augustin Cendre from Stifel. Please go ahead.

[Augustin Cendre, Stifel]

Good afternoon. Thank you for taking my questions. I've got three if I may. First off, I'd like to have if possible some updates on the risky projects that you mentioned during the full 2022 conference call. Could you please update us on the level of provisions and whether they are sufficient for the projects for the risky projects that you have?

Second -- my second question sorry is on high-tech infrastructure, you commented that you hired 5,000 professionals in the last 12 months and I imagine these kind of skill sets are scarce and as a consequence can be expensive. Could you comment on the margin of projects focused on high tech infrastructure in your order book? And as a side note, is the margin in Americas this quarter driven by this?

And finally, a question on the working capital. I saw that the working capital outflow was quite strong in Q1 and Q2. So, a very strong reversal, so could you comment on it, and given that it appears quite unusual versus history. Thank you very much.

[Juan Santamaria, CEO]

And sorry, just one portion, you're asking about the working capital at the end, the last question, right?

[Augustin Cendre, Stifel]

Yes. Working capital.

[Juan Santamaria, CEO]

Okay. All right. So I'll start with the projects. Well, first of all, and as an introduction, we have been focused and not now, but for a number of years right now, since some of the one-offs that we had in the past to make sure that we address all the risks. I mean, not only of the new order book, but also to make sure that we have the necessary provisions in our projects.

If you're going through a private client basis from the middle of the year or the position at the end of last year, things have not changed significantly. I mean 470 continues its part in the arbitration, and again I think that I mentioned in 2022 we're comfortable with the level of provisions and how our approach is going in the right direction when it comes to constructions and conversations with the clients -- with the clients, and all very positive.

Other is hospital, which is the other project in the list, well, that one has been in arbitration forever. And I believe that we have the right level of provisions, with no doubt, and it's worst case, which our cash that will come to us again with the high level of provisions allocated to the job, the Rastatt in Germany, I think that's the other project that was discussed in 2022 very close to a resolution on that one and very good resolution with no impact to us. And I'm not sure if there's, I don't think there's any other project in the list. So that's on the first question.

Second question, so yes, I know resources is the most important thing nowadays, to attract resource, to retain resources, to have skilled labor is number one priority and number one challenge, okay? I believe that because of our ability to bring resources that's why we're being so successful, that's nowadays is the number one reason why clients award projects to companies. It's not just about training or performance or engineering capabilities or balance sheet, because right now most of the risks -- of the projects are in the risk, it's about what's your ability to make sure you have people, that's the certainty they have to finance a project within the framework. Most of these projects, they are driven by timelines. Any delay causes major losses to the client.

So, it's not so much driven by the price or the cost of infrastructure. It's driven by how fast you can finish, and how you make sure that you -- you have the right skills to finish them on time. So, I believe that, that's allowing us to be competitive, together with our geographical diversity together with some of our supply chain capability that I was mentioning before. Which are margins that we're asking? Do you remind that most of our projects as we get into a low-risk scenario have -- I mean, we tried to maintain margins, in fact, Turner, for example, have low margins in most of the products especially in the traditional ones. High-tech are allowing us to increase margins. That's why if you look at HOCHTIEF North America, they -- it is increasing margins from 2.1% at the end of the year, right now, it's starting 2.4% as we get into new first phases of this high-tech projects. So we are starting to ramp up, still the early phase, right, because it's early days, but those will go out. And I don't want to mention specific margins because of competitive reasons, and most of them are confidential, but they are significantly above the traditional HOCHTIEF margins and traditional infrastructure, and we will be seeing that in North America as we follow.

The same philosophy applies to Asia-Pacific, and -- including Australia. I mean we want to high-tech because we want to make sure that we work with clients on a collaborative basis, selling our engineering expertise and knowledge, but of course on a reasonable approach collaborative, and with reasonable margins. Working capital, there's one main reason which is basically, CCPP, but first of all and before I go into CCPP, let me compare two things, when we talk about free cash flow.

First, the most useful comparison for cash flow performance is the underlying cash flow from operating activities pre-factoring, right? That includes net working capital changes. And if you look at H1 cash flow, it's similar level to the prior year with a very strong momentum, but it's very, very similar to prior year. If you adjust for seasonality, which is what the last 12 months cash flow from operations pre-factoring stands for, it is pretty much at a very strong level of close to EUR1.2 billion, which is EUR400 million more year-on-year, right?

Now, If you look at specifically about the net working capital figures, which is probably the figure that you're seeing right now, everything is above the CCPP project payment, because last year had a positive impact in 2022 because it came as liability, while having a negative impact in 2023. If you were to adjust for this, the statutory net working capital figures will be very, very similar EUR475 million, H1 2023 versus EUR470 million same period last year. If you want more detail about this, please, I mean, follow offline I think that it's an important matter and should be prioritized earlier.

[Augustin Cendre, Stifel]

Okay. Thank you very much.

[Operator]

The next question is from the line of Joao Safara from Banco Santander. Please go ahead.

[Joao Safara, Banco Santander]

Yes. Hi, good afternoon. Just two questions from my side. The first one on the guidance. I understand, if we -- you don't usually change your guidance, and you're obviously on track to changes, but if you go and see detail by detail, I'm still quite surprised with the -- how conservative is your guidance on Abertis, considering what you've done on the first half of the year, you're basically up 65%, and you are mentioning a similar performance as in 2022 for the full year. So, I don't know if you could give a bit of color on that one.

And then, the second one just to understand a bit more what are the changes in your business going forward, considering that, and maybe I -- maybe I got it wrong, but it seems that you are now more focused on projects where you have to deploy capital than before. And so, what will this mean in terms of capital employed and your, I mean, needs in terms of equity financing for this projects. If you could give us, I don't know some figures or some ideas of what to expect in the future. Thank you, Juan.

[Juan Santamaria, CEO]

So, let's start with the first one on the guidance. Are we cautious when we start with guidelines? I mean, the guidelines is -- I mean, we need to make sure that we don't overstate when we state guidance because of legal implications. So, we will provide [indiscernible] always obviously to be sensitive when we report on the guidance. When it comes to Abertis, so yes, it has a very strong start in 2023 and traffic was up 5% year-on-year in Q1 and 4% in Q2. And, there were -- a lot of that was driven as well because of the solid increases in tariffs, right. It was around 7.4%.

And now, what should we expect for the second year? We're heading into an important Q3 area, and so we need to wait a little bit to see. And so we are trying not to anticipate what's happening in H2 as a trend of H1, right. So we are trying to be careful. It's not about predicting our projects or profit or infrastructure about [indiscernible] prominence. So there's so many [indiscernible] we're have trying to provide a guidance and it's risky and [indiscernible] perspective, and also from a business perspective, at the same thing forecasting traffic and forecasting real business.

Then when it comes to your second question, sorry, and it was, yes, capital allocation. We always had a similar capital allocation in the old days, I think we've been number one group, construction group investing in greenfield projects when it came to highways to ports to airports in the past, we have always, always dedicated a strong part of our appetite into those projects. And our strategy is to make sure that we consolidate, not only in the traditional areas, [indiscernible], airports, ports, highways, et cetera, et cetera, but also in all the new areas, all the new infrastructure, right? I mentioned in energy transition, batteries, hydrogen, but also in recycling, but also sustainable mobility, 5G, datacenters, semiconductors, et cetera, et cetera, right? So we want to make sure that we are able to build those projects as we have built in the past, highways, et cetera, right? And obviously as projects, we analyze opportunities in terms of deploying cash and deploying capital.

And I must say that we believe that there is plenty of opportunities in the renewable space, there's opportunities in the recycling space, there's opportunities in the 5G and datacenter space, there's opportunities in some of the logistics fronts including some autonomous vehicles and we do have that technology from the operations for mines in Australia. And we see opportunities in more medium, long-term in hydrogen, especially in [indiscernible].

We follow the same [indiscernible] in the past when we came to highways, and ports and airports. So nothing has changed in terms of deploying capital. What is going to change is where we're going to deploy the capital. Right now so far, the first opportunities are coming from renewable sector in some of the natural resources sectors and datacenters, but in the future, we're going to see more at growth at the examples I gave.

[Joao Safara, Banco Santander]

Perfect. Thank you very much.

[Operator]

The next question is from the line of Kieran McMahon from BNP Paribas Exane. Please go ahead.

[Kieran McMahon, BNP Paribas Exane]

Good afternoon. Two quick questions from me. One on the new order. You mentioned 50%, about 50% of the new order in H1 was targeted new markets. How do you expect this percentage to change over the next two years. And second question on Americas, the revenues in Q2 slowed down significantly versus Q1. And I believe it was up 3% year-on-year. Was it just tough comp? What are you actually seeing? A slowdown in activity? Thanks.

[Juan Santamaria, CEO]

Okay. The first one what can we expect to grow, I mean, it's growing I mean the amount of investment in many areas is unbelievable. I mean how much we can take off those depends more on us and our ability to bring resources and our capacity on the supply chain more than the market. The market is unlimited from what we are seeing. So, it comes to us. It can grow significantly. And it depends on the market, civil and building, I see slowing down stabilizations, little bit increase, and I don't see the rate of growth for the new areas that we're [indiscernible]

When it comes to North America, no, I mean certainly not slowing down. On the contrary, I mean, North America is going the other direction. There are difference between the Q1 and Q2, and that's where you see the -- and I guess you're referring to the 0.6% sales growth versus the 16% in Q1 2023, right? I think that you're talking about that. I mean, we're seeing at 7%, if you go the average. But the new orders which is driving the future of that has grown at 32% in local currency terms.

So, growth of 32% of new orders. That sales -- don't look at the sales Q1, Q2, I mean, construction is not mathematical, right. At the end of the day, Q1-- at the end of that, you see a trend. If something has come more in one month or some others get delayed to the next month, it's relevant. The important thing is, obviously to see a period of time six months, nine months, one year, right. That's important thing, right now it's not to focus on that 0.6% versus 16% in Q1, it's to focus that 32% in new orders and growing, right. That's where we see the growth.

[Kieran McMahon, BNP Paribas Exane]

Excellent. Thanks, Juan.

[Operator]

[Operator Instructions] So far, there are no further question, and I hand back to Mike Pinkney for closing comments.

[Michael Pinkney, Head, Corporate Strategy]

Okay, thanks very much. Thanks very much to everyone for joining us. Juan?

[Juan Santamaria, CEO]

Thank you so much, everyone. I appreciate your time. And again, any question, please, and we'll be more than happy to follow up offline. Thank you.